For decades, Australian business owners have relied on a standard blueprint to protect their most valuable assets: splitting their business into two entities.
Under this structure, an Asset Owner (a holding company) owns the expensive machinery, vehicles, or equipment, while an Operating/Trading Entity leases those assets to run the day-to-day business.
The goal was simple—if the trading entity encountered financial trouble or was sued, the valuable assets remained safe in the holding company because the trading entity didn’t “own” them.
The Personal Property Securities Act 2009 (PPSA)
The Personal Property Securities Act 2009 (PPSA) fundamentally changed this equation.
Under the PPSA, holding paper “title” or legal ownership is no longer enough to protect your property. When an Asset Owner leases equipment or vehicles to a related Trading Entity for a term exceeding two years (or an open-ended arrangement that extends past two years), the law reclassifies this lease as a “PPS Lease”.
Under the PPSA, this transaction is treated as a loan or security agreement:
- The Asset Owner is legally treated as a Secured Party (like a bank).
- The Trading Entity is legally treated as a Grantor borrowing the assets.
Because the law redefines ownership this way, an Asset Owner who relies solely on the traditional idea of ownership (without complying with the PPSA) is operating without legal protection.
Why Business Owners Should Care
Failing to recognise the lease of equipment between the related entities as a PPSA security interest exposes your business structure to two catastrophic risks:
Total Loss of Assets (The Vesting Rule)
If the Trading Entity encounters financial hardship and enters voluntary administration or liquidation, Section 267 of the PPSA triggers the “vesting rule”.
If the Asset Owner has not registered its interest in its assets on the Personal Property Securities Register (PPSR), its unregistered security interest automatically vests in the Trading Entity.
Practically, this means:
- The Asset Owner’s legal ownership is stripped away.
- The equipment becomes the property of the Trading Entity’s estate.
- The administrator/liquidator can seize and sell your machinery to pay off the Trading Entity’s third-party creditors (such as suppliers, the ATO, or employees).
- The Asset Owner is demoted to a mere unsecured creditor, usually recovering little to nothing.
Crucially, even if everyone involved knew the holding company owned the equipment, an unregistered interest is still lost upon liquidation.
Loss of Assets to the Trading Entity’s Bank
Even without an insolvency event, an unregistered Asset Owner can lose its equipment to the Trading Entity’s bank.
Under the PPSA, a lessee in possession of goods acquires sufficient rights to grant a security interest over those goods to a third party.
If the Trading Entity grants its bank an “All Present and After-Acquired Property” (APAAP) security interest, and the Asset Owner has failed to register its lease, the bank’s registered interest takes priority over the Asset Owner’s unregistered ownership.
If the Trading Entity defaults on its bank loan, the bank can legally seize and sell the Asset Owner’s equipment to satisfy the Trading Entity’s debt.
A Case Study: ABC Group
ABC Group’s accountant had set up an asset protection structure with ABC Assets as the asset owning entity, leasing equipment and machinery (worth $900k) to its related trading business, ABC Trading.
The Group had banking facilities and finance with the CBA and the Group had granted CBA security over all their assets under an APAAP security which secured approximately $800k in debt.
ABC Assets had also financed its equipment through several equipment financiers who had security over the individual items of equipment ($435k was still owing to those financiers).
Unfortunately, (as is often the case) the accountants had not mentioned the need for ABC Assets to comply with the PPSA and accordingly ABC Assets had not registered their interest in the equipment leased to ABC Trading.
When ABC Trading collapsed into Voluntary Administration, ABC Assets’ equipment vested in ABC Trading and was used to meet the claims of its creditors and the costs of the Administration.
As Voluntary Administrations go, the ABC Trading Administration was a success with secured and priority creditors receiving full repayment and unsecured creditors receiving 8 cents in the dollar.
Because ABC Assets lost their equipment and machinery (worth $900k) to ABC Trading, they were able to claim in its Administration as an unsecured creditor, recouping $73k in dividends. Unfortunately, not enough to repay their equipment financiers the $435k in outstanding equipment loans. ABC Assets collapsed into insolvency.
All ABC Assets had to do to avoid this outcome was comply with the PPSA. Two very basic PPS registrations (costing $12) would have protected ABC Assets’ equipment.
Practical Things to Consider
To ensure your asset protection structure functions as intended and withstands scrutiny, the Asset Owner must act like a secured lender and take the following steps:
- Put a Written Security Agreement in Place: Ensure the lease or equipment hire arrangement between the Asset Owner and Trading Entity is formally documented in writing, signed, or adopted by both entities before or at the time the assets are transferred.
- Register on the PPSR Promptly: Register a financing statement against the Trading Entity on the PPSR.
- Claim PMSI “Super-Priority”: Because the Asset Owner is funding or providing the specific equipment under a lease, it holds a Purchase Money Security Interest (PMSI). Ticking the PMSI box during PPSR registration grants the Asset Owner “super-priority” over existing bank security agreements.
- Watch the timing of registrations: ensure registrations are performed within 20 business days of the creation of the equipment lease and within 15 business days of the Trading Entity obtaining physical possession of the equipment (or before the Trading Entity obtains physical possession where the Trading Entity intends to lease/hire out the equipment).
- Ensure Exact Data Accuracy: PPSR registrations require absolute accuracy. If the Trading Entity is an incorporated company, the registration must be made against its ACN, not its ABN. Registering against an ABN when an ACN is required is a “seriously misleading defect” that invalidates the registration and leaves the equipment exposed to liquidators.
The Importance of Complying with the PPSA
Asset protection structures are an excellent way to protect your business assets, but they must comply with the PPSA. It’s a simple equation, if you don’t comply with the PPSA your asset protection structure will not protect your assets.
If you use an asset protection structure and you’re not currently complying with the PPSA speak to your accountants or legal advisors.
PPSAdvisory offers a complete service to ensure your asset protection structure truly protects your assets.
We’ll:
- Prepare a PPSA compliant Deed of Lease
- Perform the necessary general PPS registrations as well as specific Motor Vehicle registrations for each vehicle (if any).
- Address the likely timing issues caused by late registration
Just get in touch with our team at info@ppsadvisory to learn more.
